The world’s largest retailer, Walmart (NYSE:WMT), has been in the news for asking its suppliers in China to cut prices, to pass on the benefit of a devalued yuan to its customers. The company reportedly has contacted more than 10,000 of its suppliers in China, pushing them to reduce costs by 2% to 6%. This includes toys, electronics, furnishings, apparel, beauty products and general merchandise, once again demonstrating the company's commitment to its mission of “Every Day Low Prices” for its customers.
The company has found it difficult to maintain profit margins. The fact that it had to invest $1 billion earlier this year to increase wages for 500,000 workers has not helped matters either.
The company's stock is already down 26% so far this year. However, with strong fundamentals, the scrip is expected to stage a turnaround.
The coming quarter
Actual sales are expected to cross $120 biillion for Walmart Stores when the reports are declared on Nov. 17.
Wall Street analysts have predicted a target price of $75 for the stock in the near term, and a majority have rated the company as a “Hold.”
These are some observations that explain why 4% of Warren Buffett's holdings constitute 60 million shares of Walmart.
- The company has a yield of 2.7% and is one of the few stocks to have increased quarterly dividend distribution consistently over the last 25 years.
- The revenue of the company has grown at a higher-than-industry growth rate of 4.3%.
- Management of debt levels has been impressive, as the company’s debt-equity ratio of 0.62 is lower than industry average.
The only cause for concern then is the net income that has fallen from over $4 billion to just above $3 billion in the previous quarter. This is due to depleted profit margins.
A possible solution
The pressure on suppliers in China to cut costs and new vendor agreements is a viable solution to boost profit margins. However, it is expected that this strategy will meet objections from vendors who will find it difficult to meet the company’s demand for low prices.
More than Walmart U.S., Walmart International, which operates in 26 countries outside the United States, is better positioned to increase profitability. However, that segment currently contributes less than 30% of the company’s sales. With that going up, profitability as a whole should increase.
